SEC sues China-based Subaye over 'fraudulent scheme'

NEW YORK (Reuters) - The U.S. Securities and Exchange Commission said on Wednesday that Subaye Inc agreed to settle claims the China-based online services provider deceived auditors and misled investors about its business.

The settlement, which the agency said includes injunctions but no money, was announced as the SEC filed a lawsuit in U.S. District Court in New York against Subaye and its former chief financial officer. Subaye is neither admitting nor denying the allegations, the SEC said.

The lawsuit marked the latest action by the federal securities regulator related to Chinese companies listed on U.S. stock exchanges following a string of accounting scandals in 2010 and 2011.

The lawsuit alleged the company and Crane engaged in a "fraudulent scheme" in which they falsely promoted the company as having millions in dollars in revenue and focused on providing media or Internet services to Chinese businesses.

No one responded to an email listed on Subaye's website, and a lawyer the SEC said represented the company said he no longer did. NASDAQ delisted Subaye in November 2011.

Crane, who is not settling, did not respond to an email seeking comment, and a woman who answered the phone at a number listed for him in regulatory filings said it was not his number.

The SEC said that Subaye and former CFO James Crane engaged in a "fraudulent scheme" in which they falsely promoted the company as having millions in dollars in revenue and focused on providing media or Internet services to Chinese businesses.

"In retrospect, there were signs that the company was not what it held itself out to be," the lawsuit said.

Among other signs, the SEC said, the company's business kept changing, from claiming to distribute video advertising and media services to Chinese businesses from 2008 to 2010 to, starting September 2010, focusing on cloud computing.

Despite the shifts in business model, Subaye claimed to be growing, with revenues of $39 million in 2010 and projected revenues of $71 million in 2011, the year it was switching to cloud computing and stopping its other businesses.

The SEC said money was "vanishing." The company expensed $22 million in 2010, more than half its revenues, as "marketing expenses."

The SEC said the scheme began to come apart in December 2010, when it hired a new auditor, PricewaterhouseCoopers Hong Kong, which began posing questions about the company's revenues, customers and marketing expenses.

Crane, who the SEC says lives in southern California, soon after resigned. PwC resigned as well.

Facing delisting from NASDAQ, Subaye hired a new chief executive, German businessman Alexander Holtermann, to help bring it into compliance, the lawsuit said.

But according to the complaint, when Holtermann went to Subaye's headquarters in May 2011, he found the building the company's former president pointed him to was in a university building.

When he knocked on the door, no one answered, the SEC said.

"Students working in nearby offices reported that the offices had been cleared out the day before, and Holtermann's view through an outside window seemed to confirm this," the SEC said.

He eventually found himself with $200,000 and a box of documents, and was "told this was all that remained of Subaye," the SEC said.

The case is Securities and Exchange Commission v. Subaye Inc, et al, U.S. District Court, Southern District of New York, No. 13-3114.